This article was originally published by the Louisiana State Medical Society, which has partnered with KSWB to feature guest articles concerning common legal issues facing the medical profession.

Our initial article concerning the Anti-Kickback Statute (the “AKS”) titled “Physician’s Guide to the Anti-Kickback Statute – Part I” addressed the AKS prohibition in detail. As further explained therein, the AKS, as amended, is a criminal statute that prohibits anyone from knowingly and willfully soliciting or receiving, or offering or paying, any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for referring, or to induce a person to refer, an individual for the furnishing or arranging for the furnishing of any item or service for which payment ma1 X5 A8647y be made in whole or in part under a Federal health care program. 42 U.S.C. § 1320a-7b(b)(1) and (2). The AKS, as amended, also contains a similar prohibition forbidding the exchange of remuneration in return for the, or to induce a person to, purchase, lease, or order (or for arranging for or recommending the purchase, lease or order of) any good, facility, service or item for which payment may be made in whole or in part under a Federal health care program. Id. Since its inception, the AKS has expanded well beyond prohibiting what is commonly understood as cash kickbacks or bribes in the context of providing or seeking certain referrals and now prohibits many non-cash arrangements where even a single purpose of the arrangement is to induce referrals of Federal health care program business. Perhaps because of this expansion, and the uncertainty that it has created concerning what arrangements violate the statute, various exceptions to the application of the AKS, and various regulatory “safe harbors” outlining certain arrangements that will be permitted under the AKS, have been created. These exceptions and safe harbors are the focus of this article. Consistent with our previous AKS prohibition article, this article is not intended to provide an exhaustive treatment of available AKS exceptions and safe harbors, but rather, to serve as a general reference and educational guide. Accordingly, physicians and medical practices are encouraged to seek advice from their own counsel to address specific legal issues that arise in their individual practices.

The AKS Exceptions and Safe Harbors.

Congress has to date created ten (10) separate exceptions to the application of the AKS, including an exception that permits the Secretary of the United States Department of Health and Human Services (“HHS”) to promulgate regulations outlining certain practices that will not be prosecuted under the AKS or result in exclusion from participation in Federal health care programs. In turn, the Office of Inspector General (the “OIG”) (on behalf of the HHS) has to date promulgated more than twenty-five (25) separate regulatory “safe harbors.” Each safe harbor has very specific requirements, often including that the remuneration contemplated by the proposed arrangement be consistent with fair market value and that the proposed arrangement otherwise be commercially reasonable. However, because the AKS is not a strict liability statute, an arrangement that implicates the AKS may still be permissible even if it does not fully satisfy an applicable safe harbor. Even so, a proposed arrangement should be structured to comply as closely as possible with a safe harbor, precisely because the reach of the AKS is so expansive and many proposed arrangements are neither clearly permitted under, nor prohibited by, the AKS. We will first identify all AKS exceptions and safe harbors that are available and then discuss the often-employed safe harbors for space and equipment rental and personal services and management contracts. As we discussed in our previous articles concerning the Stark law and the exceptions thereto, it is important to recognize that the AKS exceptions and safe harbors are frequently re-defined, and typically contain subjective standards dependent on the facts and circumstances of the particular financial relationship. Indeed, whether a particular financial relationship fully satisfies an applicable exception(s) or safe harbor(s) is rarely black and white, and many physicians and medical practices ultimately have to determine whether they are comfortable operating in some shade of grey.

i. Available Exceptions.

The AKS specifically provides that it “shall not apply to” the following designated payment practices:

properly disclosed discounts or other reductions in price;

payments to bona fide employees;

certain payments to group purchasing organizations;

waivers of coinsurance for Medicare services for individuals who qualify for certain Public Health Service programs;

certain risk-sharing and other arrangements with managed care organizations;

certain waivers or reductions by pharmacies of cost-sharing imposed under Part D;

any remuneration between a federally qualified health center and a Medicare Advantage organization pursuant to written agreement;

certain remuneration that helps a health center entity serve an underserved population; and

See 42 U.S.C. § 1320a-7b(b)(3). The AKS also provides that it “shall not apply to” those payment practices specified by the HHS Secretary in certain regulations. These specified payment practices are commonly referred to as “safe harbors.”

ii. Available Safe Harbors.

The current safe harbors promulgated by the OIG (on behalf of the HHS) cover the following types of arrangements:

investments in certain large or small entities;

investments in entities in underserved areas;

space rentals;

equipment rentals;

personal services and management contracts;

sales of physician practices in health professional shortage areas to hos­pitals or other entities;

cost-sharing waivers for beneficiaries who qualify for the low-income subsidy under Medicare Part D.

iii. Key Safe Harbors.

Office Space and Equipment Rental Safe Harbors.

As noted in our initial article concerning the AKS, even non-cash arrangements, such as a hospital renting office space to a physician at a rental rate below fair market value (or a hospital renting equipment from a physician at a rental rate above fair market value) may violate the AKS, i.e., may be deemed a disguised kickback, if even one purpose of the arrangement is to induce referrals. In fact, the OIG will presume that the purpose (or at least a purpose) underlying any lease arrangement that includes rental charges above or below fair market value is to induce, or receive remuneration in return for, referrals. See, e.g., Special Fraud Alert: Arrangements for the Provision of Clinical Laboratory Services, Office of Inspector General, October, 1994 (discussing the AKS and explaining that “[w]henever a laboratory offers or gives to a source of referrals anything of value not paid for at fair market value, the inference may be made that the thing of value is offered to induce the referral of business.”). In an effort to avoid AKS scrutiny by the OIG, these (or similar) leasing arrangements are typically structured to comply with the safe harbors for rental of space and rental of equipment, as appropriate. Each of these safe harbors includes identical requirements and provides that any payments made by the lessee to the lessor will not be deemed remuneration for purposes of the AKS if:

the lease arrangement is set out in writing and signed by the parties;

the lease covers all of the premises or equipment leased between the parties for the term of the lease and specifies the premises or equipment covered;

in the event the lease is intended to provide the lessee with access to the premises or use of the equipment for periodic intervals of time, rather than on a full-time basis for the term of the lease, the lease specifies exactly the schedule of such intervals, the precise length of such intervals, and the exact rent for such intervals;

the term of the lease is for not less than one year;

the aggregate rental charge is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or other business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs; and

the aggregate space or equipment rented does not exceed that which is reasonably necessary to accomplish the commercially reasonable business purpose of the rental.

42 C.F.R § 1001.952 (b) and (c). Note that these often-used safe harbors not only require that the rental charges be consistent with fair market value, but also that the proposed lease arrangement be commercially reasonable. Of further note, while rental charges must be consistent with fair market value in order for a proposed lease arrangement to be commercially reasonable, a proposed lease arrangement that includes fair market value rental charges may nonetheless be commercially unreasonable for other reasons. As the fair market value and commercial reasonableness requirements are also contained in the regularly-employed safe harbor for personal services and management contracts (further discussed below), let’s briefly examine each of these requirements in greater detail.

“Compensation must be consistent with fair market value” – For purposes of the AKS, “fair market value” cannot include the value attributable to referrals. See, e.g., Special Fraud Alert: Arrangements for the Provision of Clinical Laboratory Services, Office of Inspector General, October, 1994 (discussing the AKS and explaining that “[b]y ‘fair market value’ we mean value for general commercial purposes. However, fair market value must reflect an arms-length transaction which has not been adjusted to include the additional value which one or both of the parties has attributed to the referral of business between them.”); and OIG Supplemental Compliance Program Guidance for Hospitals, January 31, 2005, p. 4866 (discussing the AKS in the context of compensation arrangements between hospitals and physicians and explaining that “[t]he general rule of thumb is that any remuneration flowing between hospitals and physicians should be at fair market value for actual and necessary items furnished or services rendered based upon an arm’s-length transaction and should not take into account, directly or indirectly, the value or volume of any past or future referrals or other business generated between the parties. Arrangements under which hospitals (i) provide physicians with items or services for free or less than fair market value, (ii) relieve physicians of financial obligations they would otherwise incur, or (iii) inflate compensation paid to physicians for items or services pose significant risk. In such circumstances, an inference arises that the remuneration may be in exchange for generating business.”). Consistent with these general tenets, the AKS safe harbors for space and equipment rental define “fair market value” as the value of the rental property for general commercial purposes – or the value of the equipment when obtained from a manufacturer or distributor – not adjusted to reflect the additional value that either the prospective lessee or lessor would attribute to the property – or equipment – as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made under a Federal health care program. 42 C.F.R. § 1001.952(b)(6) and (c)(6). Although the OIG is statutorily precluded from opining on whether fair market value shall be, or was paid or received for any goods, services or property pursuant to 42 U.S.C. § 1320a-7d(b)(3)(A), the OIG has also clearly indicated that “[i]n some cases, particularly rentals, hospitals should consider obtaining an independent fair market valuation using appropriate health care valuation standards.” See OIG Supplemental Compliance Program for Hospitals, January 31, 2005, p. 4876.

“The arrangement must be commercially reasonable” – For purposes of the AKS, an arrangement is “commercially reasonable” or, more specifically, has a “commercially reasonable business purpose,” if the arrangement provides for a lease or purchase of an item or service “that the lessee or purchaser needs, intends to utilize, and does utilize in furtherance of its commercially reasonable business objectives.” See 64 Fed. Reg. 63525-26 (Nov. 19, 1999). The intent of the ‘‘commercially reasonable business purpose’’ test is “to preclude safe harbor protection for health care providers that surreptitiously pay for referrals – whether because of coercion or by their own initiative – by renting more space or equipment or purchasing more services than they actually need from referral sources.” Id. As with compensation that varies from fair market values, the OIG presumes that the purpose (or a purpose) for parties entering into an arrangement that is not commercially reasonable is to induce, or receive remuneration in return for, referrals. See, e.g., OIG Special Fraud Alert on Rental of Space in Physician Offices by Persons or Entities to Which Physicians Refer, 65 Fed. Reg. 9279 (Feb. 24, 2000) (discussing suspect rental arrangements for physician office space under the AKS and explaining that “[s]uppliers should only rent premises of a size and for a time that is reasonable and necessary for a commercially reasonable business purpose of the supplier. Rental of space that is in excess of suppliers’ needs creates a presumption that the payments may be a pretext for giving money to physicians for their referrals.”) By way of example, arrangements that are not commercially reasonable include the rental of an entire physician’s office for one afternoon a week by a comprehensive outpatient rehabilitation facility that only requires one examination room to provide its services and a teaching hospital arranging for a cardiologist to provide academic services when the cardiologist is not qualified to teach and fails to perform the majority of his purported job duties. Id. and U.S. v. Campbell, 2011 WL 43012, No. 08-1951 (D. N.J., Jan. 4, 2011).

Personal Services and Management Contracts Safe Harbor.

As its name implies, parties often attempt to comply with the safe harbor for personal services and management contracts when structuring arrangements involving the provision to health care providers of personal services, including physician consulting services or marketing services, or management services, whether provided by a healthcare or non-healthcare individual or entity. This safe harbor provides that any payments made by a principal to an agent (defined as any person, other than a bona fide employee of the principal, who has an agreement to perform services for, or on behalf of, the principal) as compensation for the services of the agent will not be deemed remuneration for purposes of the AKS if:

The agency agreement is set out in writing and signed by the parties;

The agency agreement covers all of the services the agent provides to the principal for the term of the agreement and specifies the services to be provided by the agent;

If the agency agreement is intended to provide for the services of the agent on a periodic, sporadic or part-time basis, rather than on a full-time basis for the term of the agreement, the agreement specifies exactly the schedule of such intervals, their precise length, and the exact charge for such intervals;

The term of the agreement is for not less than one year;

The aggregate compensation paid to the agent over the term of the agreement is set in advance, is consistent with fair market value in arms-length transactions and is not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs;

The services performed under the agreement do not involve the counselling or promotion of a business arrangement or other activity that violates any State or Federal law; and

The aggregate services contracted for do not exceed those which are reasonably necessary to accomplish the commercially reasonable business purpose of the services.

42 C.F.R. § 1001.952(d). As you can see, the requirements for the personal services and management contracts safe harbor are practically identical to the requirements for the office space and equipment rental safe harbors, including the often-analyzed requirements that the aggregate compensation be set in advance, be consistent with fair market value, and not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties (see requirement e). Note, however, that unlike the safe harbors for office space and equipment rentals, the safe harbor for personal services and management contracts does not explicitly define the term “fair market value.” Accordingly, physicians and medical practices are advised to consider the general tenets of fair market value espoused by the OIG – and addressed above in connection with the office space and equipment rental safe harbors – to evaluate whether the aggregate compensation paid to the agent over the term of the agreement is consistent with fair market value. The other often-analyzed requirements, specifically, that the aggregate compensation be set in advance and not be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties, seek to prohibit parties from periodically adjusting compensation that is otherwise permissible (to the extent it is consistent with fair market value, for example) in an effort to improperly reward referrals. Note also, however, that the “set in advance” requirement contained in these AKS safe harbors, which requires that the “aggregate” compensation be set in advance, is typically more difficult to satisfy than the “set in advance” requirement contained in the Stark Law exceptions discussed in one of our previous articles, titled “Physician’s Guide to Stark Law – Part II,” which only requires that the compensation formula be set in advance. Of course, when attempting to structure an arrangement that complies with a Stark Law exception and/or an AKS safe harbor, compensation – whether aggregate or not – should never be determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.

State Anti-Kickback Statutes.

Every state, including Louisiana, not only has its own Stark law statutes, but also has its own Anti-Kickback Statutes. Louisiana’s Anti-Kickback Statute can be found at La. R.S. § 37:1745. In our next article, we will address Louisiana’s state Stark law and anti-kickback provisions.

Disclaimer: The information provided herein (1) is for general information only; (2) does not create an attorney-client relationship between the author or the author’s firm and the reader; (3) does not constitute the provision of legal advice, tax advice, or professional consulting of any kind; and (4) does not substitute for consultation with professional legal, tax or other competent advisors. Before making any decision or taking any action in connection with the matters discussed herein, you should consult with a professional legal, tax and/or other advisor who should be provided with all pertinent facts relevant to your particular situation. The information provided herein is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information.